Why You Might Not Want to Invest in Tesla Motors … Yet

The entrepreneurial instincts of Elon Musk -- the multibillionaire technological wiz behind Tesla Motors (NASDAQ: TSLA) , SolarCity, and SpaceX -- allow Musk to take practical steps to manifest a larger vision, whether it be with cars, energy delivery, or space travel. In 2013, Tesla Motors was tapped as one of the top 10 most innovative businesses in the world by Booz & Company. While few can doubt the innovative capabilities of Musk and Tesla Motors, investors should be cautious about jumping into Tesla at current levels. Innovation can come with a price, and Tesla shares are priced for perfection after increasing 353% in 2013.

Tesla's high expectations Trading at a price/sales ratio of 10.8 compared to the auto industry average of 0.58, Tesla Motors' stock price reflects high expectations for future performance. Tesla is now valued at $18.5 billion, despite clocking positive net income just once in the past year ($11.12 million in 2013's first quarter). This was the company's first and, so far, only profitable quarter since its founding in 2003.

Tesla's financial performance is improving -- the company's net loss so far in 2013 is $57.75 million, a marked increase from 2012's net loss of $396.21 million. Tesla has managed to produce $128.23 million in operating cash flow so far in 2013, a major improvement compared to negative $266.08 million in 2012.

Tesla's prospects are better understood after reviewing the company's innovative style. Tesla practices "top-down" innovation, beginning with the production of a high-priced, low volume car (the Roadster) in 2008, then moving toward a medium-priced, medium-volume car (the Model S) in 2013, with a low-priced, high-volume car slated to be released by 2017 (the Model E). Tesla's latest car, the Model S, sells for $69,900 and up -- and it is projected that Tesla delivered 21,500 Model S vehicles in 2013.

Tesla's rich valuation builds in three major expectations for the company moving forward, as I see it:

1) The Model E will sell like hotcakes (despite costing more than $30,000). 2) Tesla will profitably produce its vehicles. 3) Tesla will outdo a growing number of competing electric and hybrid vehicles.

If Tesla does indeed meet or exceed expectations with these three points, the company will likely prove to be a winning investment going forward. But at this point, that is a major and speculative if, and it plays a major role in determining whether Tesla shares are reasonably valued.

Car of the future? The overarching question is whether Tesla can become a profitable competitor in the global automotive market. Tesla is taking key steps to make electric vehicles a common reality, but the performance of the company (and stock) is hinging largely on the Model E's release in a few years. Just how great are these cars?

Tesla's all-electric vehicles, which can travel over 200 miles on a single charge, essentially represent the first realistic alternative to gasoline vehicles (and hybrids) that could potentially be offered at a competitive price. Tesla is in the midst of building a "Supercharger" network of battery charging stations, helping solve the age-old problem of charging electric vehicles on the go. Presently Tesla has 49 charging stations in North America and 14 in Europe.

Consumer Reports calls Tesla's Model S "the highest-rated car we've tested in the last five years." Tesla's technological design packs a powerful punch that will be difficult for competitors to match, gasoline cars or otherwise. Tesla's innovative manpower increased after the company recently brought on board two Apple design and manufacturing veterans, Doug Fields and Rich Heley. It will be challenging for traditional automakers to compete against Tesla's silicon valley approach to car design and assembly.

Foolish final thoughtsWhile Tesla is proving itself as a promising automotive innovator, the success of Tesla's stock hinges upon near-flawless execution over the next several years. We still have at least two years before the Model E is officially released. In the meantime, the company is struggling to net a profit or produce sufficient cash flow to finance capital expenditures; so far in 2013 Tesla has produced negative $46.56 million in free cash flow. I am reluctant to jump in as a Tesla investor because the company still has things to prove to maintain such a premium valuation.

If Tesla executes very well, the company could join the ranks of Toyota within the next two decades -- in which case the stock would be a 10-bagger from current levels. Should this be how things pan out, the present valuation of Tesla doesn't much matter in the grand scheme of things.

I would jump at the opportunity to invest in Tesla should the stock take a sizable hit. Still, at least until the Model E's mass release, Tesla shares are overly speculative at current levels for my taste. Long-term investors with a strong stomach for volatility may be comfortable opening a position in Tesla at today's levels, but should first recognize that the stock's valuation is hinging upon excellent execution at the company in the next several years. For now, investors may be able to find more suitable places for their investing dollars.

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Clearly, by Musk's own admission, the major hurdle Tesla has to overcome is to buy or make enough battery cells of the right kind for volume production of the Gen III (Model E). He sees the way forward being a "gigafactory" with enough capacity to equal or exceed all current lithium battery factories. He's indicated that he would prefer to partner with someone else (presumably a battery manufacturer) rather than for Tesla to finance it all on its own, which is quite reasonable considering how dilutive such a factory would be if it were financed through a Tesla stock offering. There is also the pesky problem that there needs to be another iteration of battery technology improvement before the Gen III can be built to spec. According to Musk, this is within the realm of probability, but probability is not yet a bird in the hand. Like the author, I don't think there's been enough discounting to allow for possible delays or snags in what is admittedly an aggressive scenario.

Tesla longs remain convinced that no other car manufacturer in the world can "catch up" to Tesla even IF the 100% EV gains mass market share. They are wrong. The R&D potential and financial muscle of Audi, Mercedes, Toyota, BMW dwarf that of Tesla. For Tesla to continue to merit a $140 share price, it needs to earn at least $10 per share. They are not close, and I doubt Tesla will be earning that 10 years from now.

It might behoove Elon Musk and Tesla to go ahead and build the giga-factory for batteries... It's not just his CARS that will use those batteries. They'll be used as in-home power storage with Solar City's PV arrays in homes across the country. Musk has a major stake in THAT company, too... There is massive room for growth there. If you can capture and store the solar power during the day, then recharge your car from those batteries at night... well, that's a LOT of CLEAN ENERGY. He'll be his own best customer.

ps- @guysisson... The Tesla S is "garbage" and a "firetrap" ? What are you smoking ? The Tesla S has won DOZENS of international accolades-

2013 World Green Car of the Year.

Automobile Magazine's 2013 Car of the Year, a unanimous decision.

Motor Trend 2013 Car of the Year, also a unanimous decision.

Popular Science's Auto Grand Award Winner Best of What's New list 2012.

Time Magazine Best 25 Inventions of the Year 2012 award.

There have only been 3 Tesla S fires worldwide and NO deaths or injuries. Gas powered cars account for HUNDREDS of deaths a year and THOUSANDS of injuries. NHTSA rates the Tesla S the safest car ever tested. You talk like a true Motley "FOOL"...

Profitability - masked by GAAP lease accounting adjustment but very real Q1, Q2, Q3 (actual) and Q4 (guidance) if you are willing to accept cash as real.

How can anyone with a straight face possibly describe Tesla as struggling with Capex when it romped across the globe on an expansion blitz and added $49 Million to its $747 Million Q2 bank balance arriving at $796 Million in Q3.

Claims of overvaluation comparing Tesla with legacy auto makers - oh cry me a river. Look at your portfolio, if you see Tesla there chances are at times you also see Netflix, Facebook, Apple, Piceline, Linkedin, Twitter, Google and no chance you see Ford, GM, Toyota etc. Nobody invests in Tesla without first understanding that the technology and business model is designed to disrupt, out-grow and replace legacy industrial giants. There is absolutely no relevance in a group of auto-stock shareholders determining that they are not interested in tech stocks and shouting their prejudices over a wall to a group of tech stock shareholders.

Why is there no mention of the Model X? I am waiting for one of the Signature Model X cars, and I'm getting discouraged by the lack of focus on that model and the time frame that keeps getting pushed back, but I'm not discouraged enough to sell my stock.

So where is Tesla going to get the raw materials needed to build this gigabattery plant? Large quantities of lithium is not easy to come by. So far all alternatives are still in a lab and could be a decade away from seeing the inside of a production car.

The model E???? Really? All we hear is rumors yet not one concrete number. We hear $30k price range being thrown out but Musk has stated that to get there the car needs to have batteries that cost half what they do now.

Then we get to the elephant in the room. Fires. One fire will drop the stock price by $20 a share. Two in a short period of time could drop it by $50 or more a share.

Finally when will the model X be on sale? Tesla needs to have this asap. One large step for the company is to go from the maker of one model to a mfg that produces a line of cars. The X is needed almost as much as a $30k E is needed.

I suspect those talking about the $30K Model E are doing so in order to be able to have future comments on how Elon didn't make the target. Musk has said *$35K* plus inflation, for starters.

I, too, was puzzled as to why there's no mention of the Model X, which has quite a list of backorders nearly a year before it hits the streets.

And GM buying Tesla? That's one analyst dreaming up stuff for television and so that his articles will get clicks. Musk himself said his money "was the first in and will be the last out".

This is what people don't realize about Tesla and Musk. This is another guy for who it's NOT just about the money scorecard. It's about making things better for the planet and the people who live on it (and making a profit in the meantime - but not "Profit Uber Alles")

Firetrap? Based on what? Did you analyze the data? Have you ever worked for an engineering firm that specializes in analyzing accidents, failures, disasters and related data? Have you ever been specifically hired by two of the big three auto makers to analyze vehicles by the thousands and investigate whether particular models pose a fire threat? Have you ever worked as a scientist? I'll be the first to admit that I haven't had a firsthand look at Tesla's data. I'l admit that I didn't see the specific vehicles. All I can go by is the public information, the statements of the vehicle owners who were glad they were in a Tesla at the time of the incidents, and loads of experience related to what causes vehicle fires. When the fires drove the price down, I picked up Tesla at 120 and wrote puts at 100, bringing the effective cost down to about 114. Within days it went back up to 150 when people realized that the fire reports were irrelevant to the vehicle's overall safety. The great thing about investing is that you can profit from those who trade shares based on emotion rather than looking at the big picture. In this case, there's nothing out there to indicate that there's an overall risk of fire greater than other peer vehicles, especially compared to those that have a tank of gasoline strapped to the bottom.

With any other product, people look at failure rates when used as directed. With autos, people look at failures when people drive cars into trees or get hit by drunk drivers, which is fine. Personally, I'd be glad to drive a Tesla because it's the overall safety rate that counts. It's a bit like saying that California is defective because it has earthquakes and moving to an area that has hurricanes. It ignores the big picture.

I might be wrong about Tesla for other reasons, but it won't be because of the fires.

DeLorean had a lack of demand, a high price for its day, poor performance reviews in major automobile magazines. The biggest reason I never bought one was that I couldn't afford one, and the second biggest reason is that I didn't want one.

It went from 0-60 in 10.5 seconds. I bought an Infiniti M45 about seven years ago that did it in 5.1 seconds and nobody would consider it a top sports car. It's a family sedan.

The demand for the Tesla is high, and did NOT fade away when it hit production or hit the market. It continues to get good reviews and new models are in the works. It's positioned well compared to other vehicles in its price range, so it's not as if people are overpaying for a novelty.

Nobody needed to come along to compete with DeLorean, which just faded away. The big auto makers would love to be competitive with Tesla, but I can't see people deciding against buying one because Ford came out with a similarly priced electric vehicle. That might be true if Ford went up against a non-established no-name brand, but Tesla got established when there was no competition and has established a reputation.

Tesla does have some issues keeping costs down, but those are linked to overcoming current limitations of technology rather than economies of scale, and big auto makers would have the same issues. And when they are resolved, Tesla will benefit as much as any potential competitor.

Big auto makers operate on thin margins and make money based on volume and repairs. Undercutting Tesla on price would not be easy. They would have to find their own niche, rather than compete head to head. I can already buy a Chevy Volt if I want to, and save a lot of money compared to a Tesla. But I would hardly consider the two competitors. The big auto makers would have to give a competing car to their luxury divisions such as Cadillac or Lincoln if they want to compete in price/luxury/performance areas, and those divisions have been slower to innovate.

I'm not saying that Tesla is a sure thing, but the analogy with DeLorean is off base. It wasn't truly innovative in its day, but was a pretty face with not much else.

Just saw a Tesla showroom and went down a road that used to have pesky speed bumps 3 days ago. At the showroom the low Tesla undercarriage reminded me of a Corvette showroom that had to build a filler for a slight dip that the cars had to negotiate to get into the show room. While I was at that showroom a front bumper was damaged by a driver who failed to put the filler in. Just a surmise, but I would guess that the speed bumps have been removed to accommodate "green" cars....an accommodation that would never have been rendered to a "red" car such as a Corvette. Pedestrians and drivers be damned as long as they are not living in their respective real worlds. Anyways, Kudos for Tesla if they have anything to do with removing speed bumps. Now it would be nice if we could get people to alter their car destroying mailboxes and giant rocks in the front yard house protectors, both showing an imbalance of respect for self and respect for others.

One green idea that could relate to the man named Tesla would be to take Niagara falls and dry it up during high electrical demand times. A sign would light up to announce the greenness of the silence surrounding the Tesla monument that exists above the falls.

Just now I wonder what norms might exist in Australia that might surprise those of us on the other continents of this world.

Sending report...

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